NZD/USD keeps nearby trading range around 0.7200 on RBNZ’s Orr, cautious optimism

• NZD/USD grinds higher inside a 70-pips trading range following a positive week-start.
• RBNZ’s Orr expects housing prices to ease over medium term.
• Market sentiment improves amid hopes of stimulus, softer US ISM PMI.
• No major data at home keep Kiwi at the mercy of overseas catalysts, RBA will be the key.

NZD/USD hovers around the upper end of the short-term range, teasing 0.7190 figures at the start of Tuesday’s Asian session. The Kiwi pair recently reacted to comments from Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr while hopes of US stimulus, a bit softer US ISM Manufacturing PMI and US-China headlines also favored the latest positive performance.

While accepting the fact that New Zealand’s (NZ) housing market challenges monetary and financial stability, RBNZ’s Orr also said, per Reuters, “Expect to see an easing in house prices over the medium term.”

Read: RBNZ’s Orr: Unsustainable level of house prices poses monetary, financial stability challenges

Given the RBNZ’s already-announced rate hike and the likely reduction in the US-NZ carry due to the Fed’s anticipated tighter monetary policy going forward, such comments from the RBNZ leader probe the NZD/USD bulls. The same fundamental logic could be applied to NZ’s neighbor and close trading partner Australia which inches closer to a rate hike amid firmer inflation, highlighting today’s Reserve Bank of Australia (RBA) monetary policy meeting. However, NZ is still the first major central bank to announce the rate lift and buyers remain hopeful of further advances ahead of any strong clues from either the RBA or the Fed concerning rate hikes, which is likely far from here.

Elsewhere, the US ISM Manufacturing PMI for October eased below 61.1 prior readouts to 60.8, beating 60.6 market forecasts. While the easing of the US private manufacturing gauge tests the Fed tapering woes, the activity figures are comfortably higher during the last four months and hence favor Fed hawks, also challenging the NZD/USD buyers.

Further, US Treasury Secretary Janet Yellen hints that the US-China Phase One trade deal and reciprocal easing of tariffs may tame the inflation. The same highlights optimism towards reaching the much-awaited trade agreement among the world’s top two economies. Also favoring the risk-on mood could be US Treasury Secretary Yellen’s comments stating, “I don’t think US economy is overheating.”

Additionally, an easing in the US inflation expectations, as measured by the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped for the fourth consecutive day from levels last seen during August 2006 by the end of Monday’s North American trading. The same hints at the Fed’s cautious action during Wednesday’s meeting and favor the NZD/USD buyers.

Alternatively, the US and the European Union (EU) joined hands to overcome the steel and aluminum tariffs to battle China over its high productions, suggesting the Sino-American rift.

Above all, the market’s wait-and-watch approach ahead of the key central bank meetings allowed the US Dollar Index (DXY) to consolidate Friday’s heavy gains, the biggest since the mid-June and helped the NZD/USD to witness a positive start to the week.

Looking forward, there are no major data/events at home and hence the quote is likely to rely on the RBA verdict for fresh impulse. Given the firmer Aussie inflation and the RBA’s pause on yield curve control, forward guidance will be the key to watch.

Technical analysis

NZD/USD grinds higher inside a 70-pip trading range between 0.7150 and 0.7220, with a firmer RSI line keeping buyers hopeful before hitting the overbought region. Meanwhile, 100-SMA and an ascending trend line act as additional downside filters around 0.7095 and 0.7055 respectively. On the contrary, an upside clearance of 0.7220 will need validation from a four-month-old resistance line near 0.7230 before aiming May’s high near 0.7320.